$1.75 trillion chases AI abroad as India misses the trade

$1.75 trillion chases AI abroad as India misses the trade

Foreign institutional investors (FIIs) now hold roughly $1.75 trillion in just three global semiconductor companies — Samsung Electronics, Taiwan Semiconductor Manufacturing Co. (TSMC) and SK Hynix — far exceeding their exposure to India’s equity market, estimated at about $750 billion, according to Nomura.

Veteran fund manager Samir Arora flagged the contrast as a reflection of India’s relative underperformance, noting that the gap highlights “how much India has lost in the past two to three years on a relative basis.”

The divergence has widened alongside sustained foreign outflows. FIIs have been net sellers of Indian equities in recent years, with cumulative outflows across primary and secondary markets estimated at over $30 to 35 billion (Rs 2.5 to 3 lakh crore) between 2024 and 2026 year-to-date. In calendar 2026 alone, net selling has already crossed Rs 1 lakh crore ($12 to 13 billion), including Rs 56,000 to 70,000 crore ($6.5 to 8 billion) in March.

AI Boom Skews Global Allocation

At the heart of the shift is a structural factor: India’s limited participation in the global artificial intelligence (AI) investment cycle.

AI has emerged as the dominant theme in global markets, driving sharp re-ratings in semiconductor and platform companies, particularly in the US and parts of Asia. This has skewed foreign allocations toward markets such as South Korea and Taiwan, which host globally competitive chipmakers and AI-linked supply chains.

India, by contrast, offers few listed companies that provide direct exposure to the AI value chain. Despite policy efforts such as the India Semiconductor Mission, large-scale investments and listed opportunities remain limited.

Some investors argue that India has effectively become an “anti-AI” trade — a relative hedge if the global AI rally were to reverse. But in the near term, the absence of investable AI themes has reduced its appeal in global portfolios.

A Double Hit: No AI Winners, Rising AI Risks

The concern extends beyond missed opportunities to potential disruption.

India’s technology ecosystem — employing roughly 5.8 to 6 million people and generating about $222 billion in software and IT services exports in FY25, according to NASSCOM — faces increasing uncertainty as generative AI and automation evolve.

Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company, described AI as potentially “the opportunity of a lifetime or the risk of a lifetime for India — depending on how we position ourselves.”

He warned that rapid adoption of AI could disrupt segments such as programming, BPO/KPO and enterprise services. “If this scales aggressively, it won’t just eliminate some jobs — it could erode a chunk of our FX revenues,” he said, pointing to spillover effects on sectors such as real estate, autos and consumption.

Still, Shah cautioned against premature pessimism. There have been no widespread contract cancellations so far, and much of IT services work extends beyond coding. He said India can still adapt through investments in sovereign AI capabilities, large-scale skilling and a shift toward product-led innovation.

Will FII Outflows Accelerate?

In the near term, the key question for markets is whether foreign selling could intensify amid additional pressures, including rising crude prices and supply disruptions.

Lakshmi Iyer, Group President (Investments) and CEO of Bajaj Alternate Investment Management, said FII selling alone may not pose a systemic risk.

Foreign investors are already at decade-plus lows in MSCI India weightings and remain “significantly under-owned,” she said. “They can’t go negative.”

Domestic flows, particularly systematic investment plans (SIPs), continue to provide a counterbalance. Annualised retail inflows of Rs 3 to 3.6 lakh crore ($36 to 43 billion) have the capacity to absorb foreign outflows, often offsetting a month’s selling within a couple of months.

Iyer described the environment as “manageable,” noting that high-net-worth and ultra-high-net-worth investors are increasingly using corrections as deployment opportunities rather than exit points.